Are Oil Prices Ready to Break out of the Trough?

In ancient Greek mythology, the Titan Atlas was charged with holding up the
world. Today, that task largely falls on the shoulders of American businesses.

For the month of November, the Manufacturing Institute for Supply Management
(ISM) reading was 58.7, marking the 18th consecutive month of manufacturing
expansion in the U.S. Anything above 50.0 denotes growth, anything below, contraction.
Among the areas that showed particularly strong growth were new orders and
exports.

But while the U.S. continues to expand, the rest of the world cools or, at
best, remains in a holding pattern. The J.P.Morgan Global Manufacturing Purchasing
Manager's Index (PMI), released Monday, registered a 14-month low of 51.8.

Had the U.S.'s individual score not been as strong, the global PMI number
might not have exceeded the expansion threshold.

The eurozone and China were the largest drags on global manufacturing. Whereas
Europe registered a 50.1 for November--even usually dependable Germany scored
a 17-month low of 49.5--China remained flat with a 50.0, the country's lowest
reading since May.

You might wonder how this relates to oil prices. The answer: Quite a lot,
actually. Just as the U.S. is the standout in manufacturing growth, it's also
now the world leader in oil production, thanks largely to hydraulic fracturing.
The two combined--global slowdown and abundant oil--have prompted the rapid
decline in prices.

Slow Global Manufacturing Growth Contributes to Slump in Oil Prices

Not only is the global PMI at a 14-month low, but it also marks the fourth-consecutive
month that the one-month reading has stayed below the three-month.

When global manufacturing has slowed in the past, so too has oil demand, driving
prices down 7 percent 100 percent of the time. Today, crude has fallen much
more steeply than that--35 percent since June--but other factors have contributed
to the recent slump, from the strong
U.S. dollar to oversupply fears.

The chart also shows that when manufacturing activity has ramped up, prices
have jumped over 16 percent 100 percent of the time three months later.

Oil in Oversold Territory

So short of an unexpected jumpstart to global manufacturing, how else might
oil break out of its trough?

"The theme going into 2015 is mean reversion," says Brain Hicks, portfolio
manager of our Global
Resources Fund (PSPFX). "Oil prices are below where they should be, and
hopefully they'll start gravitating back to the equilibrium price of between
$80 and $85 a barrel."

Crude oil is currently down 1.2 standard deviations for the 10-year period.
This might not sound like much, but as you can see, oil has rarely gone above
or below one standard deviation during this time. Plus, its wild volatility
during the financial crisis rejiggered the commodity's mean.

What the oscillator above also shows is that oil has eventually returned to
where it should be, as it did not only after the financial crisis but also
in the third quarters of 2011 and 2012. Barron's pointed out in a piece
published this week that "prior price slides lasted roughly 20 weeks. The
current slide is already at week 24. History suggests the panic... is near
its end."

Indeed, oil markets have historically been quick to recover because exploration
and production become unsustainable otherwise. Several shale regions in Texas
were already unprofitable
at $75 per barrel. At $70, expect more companies, especially those involved
in fracking and deepwater drilling, to cut production even further. The problem
is, they really can't afford to do so. It currently takes output from four
or five new wells to replace the cost of one previously drilled unconventional
well, which is why companies must keep up with exploration and production.

And that's just in the U.S. Many countries whose economies rely on oil exports,
including Russia, Venezuela and Nigeria, will be unable to balance their budgets
with $65-per-barrel oil. Though not yet underwater, Saudi Arabia might soon
begin to feel the pinch, as Brent is getting treacherously close to the Kingdom's
breakeven price, which has risen about $10 per barrel in only five years.

At the same time, many of Saudi Arabia's traditional vertical wells can continue
to operate at less than $10 per barrel. A production cut, then, is not as imperative
to the Kingdom's budget as it is to Russia's or Venezuela's. However, Prince
Turki bin Faisal, former Saudi ambassador to the United States, stated on Tuesday
that Saudi
Arabia would agree to cuts only if other countries, including non-Organization
of the Petroleum Exporting Countries (OPEC), participated. This indicates that,
while the Kingdom doesn't want to lose market share, it realizes action must
be taken to prop up prices.

And herein lies the opportunity.

"Oil is way oversold right now on a relative strength basis," Brian says.

With the commodity at a five-year low, oil stocks are on sale, just in time
for holiday shopping.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors,
Inc., which manages a diversified family of mutual funds and hedge funds specializing
in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and
certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing
global natural resources fund in 2010. In 2009, the World Precious Minerals
Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four
years for that achievement. In addition, both funds received 2007 and 2008
Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a
leading publication for the global resources industry, and he is co-author
of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve
global conflict, and the William J. Clinton Foundation on sustainable development
in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator
on financial television. He has been profiled by Fortune, Barron's, The Financial
Times and other publications.

Please consider carefully a fund's investment objectives, risks, charges and
expenses. For this and other important information, obtain a fund prospectus
by visiting www.usfunds.com or by calling
1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed
by U.S. Global Brokerage, Inc.